Appeals court upholds $1 million FBAR fineA $1 million penalty for failing to disclose a foreign financial account has been upheld by a federal appeals court. The Ninth Circuit rejected the taxpayer’s argument that the penalty was uncon...

Small business taxation, corporate tax rates, and changes to popular deductions are just some of the many complex changes to the Tax Code being debated in Congress. At the time this article was posted, the Senate is expected to approve, along party-lines, a sweeping overhaul of the Tax Code written by Senate Republicans. The House has already approved its tax bill, also along party-lines. If the Senate passes a tax bill, House and Senate conferees will seek to resolve differences between the two bills. Conferees will likely aim to reach an agreement quickly to send a bill to the White House before year-end.

Small business taxation, corporate tax rates, and changes to popular deductions are just some of the many complex changes to the Tax Code being debated in Congress. At the time this article was posted, the Senate is expected to approve, along party-lines, a sweeping overhaul of the Tax Code written by Senate Republicans. The House has already approved its tax bill, also along party-lines. If the Senate passes a tax bill, House and Senate conferees will seek to resolve differences between the two bills. Conferees will likely aim to reach an agreement quickly to send a bill to the White House before year-end.

Not since 1986 has such an extensive re-write of the Tax Code been attempted in Congress. In September, Republicans in Congress unveiled a tax overhaul framework. They followed-up with legislation in November. Almost daily, proposals have been revised as legislation moves through the House and Senate.

Several proposals have generated the most debate. They include:

Repeal of the state and local tax deduction

A new tax regime for pass-through income

Lower corporate tax rate

ACA individual mandate

Medical expense deduction

State and local tax deduction. The House bill repeals the state and local tax deduction but would permit taxpayers to deduct up to $10,000 in property taxes. State and local income taxes, or state and local general sales taxes, would not be deductible. In contrast, the Senate bill repeals the state and local tax deduction with no exception for property taxes.

Pass-through income. Both bills would change how pass-through income is taxed. The proposals are extremely technical, raising questions of how easily small businesses would understand and implement the new rules. The House bill generally taxes pass-through income at a maximum rate of 25 percent. The Senate bill calls for a 17.4 percent deduction. The bills have different definitions of what income would be eligible for the new tax treatment. Another significant difference relates to time. The Senate bill’s deduction would be temporary, expiring after 2025. The House bill is permanent.

Corporate tax rate. The House and Senate bills both lower the corporate tax rate to 20 percent. Again, the difference is time. The Senate bill would kick-in after 2019. The House bill would reduce the corporate tax rate after 2017.

Individual mandate. Individuals who do not have minimum essential health coverage must pay a penalty (known as a shared payment) when they file their tax returns. No payment is due if the individual is exempt from the requirement. The Senate bill – but not the House bill – repeals the individual mandate. Because of Senate rules, the Senate bill does not repeal outright the individual mandate but it makes the amount of the payment $0.

Medical expense deduction. Taxpayers who itemize their deductions, and who met other requirements, may be able to deduct certain medical expenses. According to the IRS, taxpayers deducted approximately $85 billion in medical expenses in 2015. The House bill repeals the medical expense deduction. The Senate bill, in contrast, preserves the deduction.

Other deductions and credits. Both bills make significant changes to some popular credits and deductions, like the child tax credit. The House bill proposes to make these changes permanent. The Senate bill envisions temporary changes, generally expiring after 2025.

These and other proposals touch every individual and business. If a tax bill passes Congress, tax planning in 2018 and beyond will look very different from 2017 and prior years. Please contact our office if you have any questions about tax legislation and tax planning.

As an economic incentive for individuals to save and invest, gains from the sale of capital assets held for at least one year unless offset by losses, as well qualified dividends received during the year, may be taxed at rates lower than ordinary income tax rates. The tax rate on long-term capital gains and qualified dividends for individuals is 20 percent, 15, percent, or 0 percent depending on their income tax bracket.

As an economic incentive for individuals to save and invest, gains from the sale of capital assets held for at least one year unless offset by losses, as well qualified dividends received during the year, may be taxed at rates lower than ordinary income tax rates. The tax rate on long-term capital gains and qualified dividends for individuals is 20 percent, 15 percent, or 0 percent depending on their income tax bracket.

The current zero, 15 percent and 20 percent rates (28 percent for collectibles) on long-term capital gains will not change under tax reform. HR 1, the Tax Cuts and Jobs Creation Act, however, does make provision to integrate these rates into the new tiered ordinary income rate structure. The Senate version, for example, provides that the 15-percent long-term capital gain rate would begin in the case of a joint return or surviving spouse, at the $77,200 income level, and the 20 percent rate begins case of a joint return or surviving spouse, at $479,000. Short-term gains would be taxed at the new, ordinary income tax rates. Year-end tax planning for capital gains –whether or not tax reform legislation passes –should therefore follow many of the time-tested techniques used in the past, with some deference to accelerating some short-term capital gains to 2018.

Where to Start

Year-end planning for capital gains should start with data collection and a review of prior year returns. This includes losses or other carryovers, estimated tax installments, and items that were unusual. Conversations about next year should include review of any plans for significant purchases or dispositions, as well as any possible life cycle plans.

When making investment decisions, economic factors in the market should take priority over tax considerations. Taxpayers should not hold assets simply to avoid paying tax on any gain. Similarly, taxpayers should not sell assets just to take a tax loss if the asset will rise in value. Only after the economic factors are considered, should taxpayers consider the tax consequences.

Capital Gains

Most types of nonbusiness property used for personal or investment reasons, such as stocks and bonds, are capital assets. As noted above, to receive the lower tax rate on capital gains, taxpayers must hold these investments for more than one year. The gain from the sale of capital assets held for one or less are ‘short-term’ capital gains are taxed at ordinary income tax rates. In addition, the long-term capital gain rates do not apply to all types of capital assets. A 28 percent rate applies to long-term gains from collectible and small business stock, while a 25 percent rate applies to unrecaptured Code Sec. 1250 gain realized on the sale of depreciable real property.

Generally, taxpayers must offset their capital gains with capital losses before applying the tax rates. Thus, cashing out stock and bonds with a built-in loss can be a simple means of providing a loss to be taken against income. If capital losses exceed capital gains for the year, individuals are only allowed to deduct up to $3,000 of the losses, whether net long-term or short-term capital gain against ordinary income. Any capital losses above $3,000 must be carried over and deducted in succeeding years.

As a result of the netting of capital gains and losses, taxpayers have an opportunity to minimize their tax liability by timing when the gains and losses occur. For example, a taxpayer could sell capital gain property before the end of the year if they have already realized capital gain losses during the year. Also, if allowable deductions for the year will exceed income, taxpayers should try to avoid realizing any additional capital losses during the year as they would be worthless or have to be carried over to the next year.

“Wash” sales. Taxpayers may want to recognize capital losses for tax purposes on stock or securities without completely abandoning their investment. One technique for maintaining the investment is to sell the stock or security at a loss, and then buy the same stock or security. The ‘wash sale’ rules, however, prevent taxpayers from claiming any loss from these types of transactions if they acquire substantially identical stock or securities within 30 days before or after the sale.

Comment. The wash sale rule can be avoided by simply waiting 31 days before purchasing substantially identical stock or securities. Even if taxpayers violate the time limits of the wash sale rule, the disallowed loss is not lost. Instead, the loss is added to cost of the new stock or securities acquired. Plus, the holding period of the new stock or securities includes the time taxpayers held the stock or securities sold for a loss.

Other Timing Rules

When dealing with capital gains, the greatest flexibility taxpayers have comes from their ability to decide when to sell assets. For example, taxpayers may know they will be in a higher income tax bracket in 2018 that would subject them to a higher capital gains rate. As a result, they could sell investments in 2017 to generate long-term capital gains to take advantage of a lower capital gains rate. In other words, spreading the recognition of income between multiple years may help minimize the total amount of tax paid in those years.

Comment. The zero percent capital gains rate creates a planning opportunity, particularly within intra-family situations. Appreciated property may be gifted to a low-bracket individual, with the gain on a subsequent sale then taxed at a zero rate to the extent that gain on top of other income does not exceed the top of the 15 percent bracket. Certain restrictions must be respected, however, including not contravening the kiddie tax rules, not exceeding the annual gift tax exclusion, and not setting up a structured transaction in which the sale after the gift has been prearranged.

Net Investment Income (NII) Tax

In addition to regular income tax liability, many individuals may be surprised to learn that they may be subject to an additional 3.8 percent tax on net investment income (NII). Recent run ups in the financial markets have increased the need to implement strategies that can avoid or minimize this tax. The NII tax is part of the Affordable Care Act and, therefore, will not be repealed under current tax-reform efforts. At least for 2017, taxpayers with income above the $200,000 threshold ($250,000 for joint filers) should assume that their net capital gains, whether long term or short term, will be subject to the additional 3.8 percent tax.

Information reporting has become a growing part of IRS’s enforcement and compliance strategy. Data matching, or even the inference that the IRS has the data to do so, statistically has increased overall income reporting nine-fold. Use of information returns, either in the form of Forms W-2, 1098s or 1099s, is here to stay, and growing.

Information reporting has become a growing part of IRS’s enforcement and compliance strategy. Data matching, or even the inference that the IRS has the data to do so, statistically has increased overall income reporting nine-fold. Use of information returns, either in the form of Forms W-2, 1098s or 1099s, is here to stay, and growing.

Each year, new information compliance requirements arrive at the start of another filing season. The filing season coming up will be no exception, with or without tax reform. Developing rules for the “sharing economy” as well as relatively new deadlines imposed under the Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), all get vetted again this January. Preparing for those deadlines, especially those rapidly coming up at the end of January, needs to start soon.

Earlier W-2s and 1099s

Under the PATH Act, employers are now required to file their copies of Form W-2, submitted to the Social Security Administration, by January 31. This deadline also applies to certain Forms 1099-MISC reporting nonemployee compensation, such as payments to independent contractors, regardless of whether the returns are filed on paper or electronically. Further, only one 30-day extension to file Form W-2 is now available and this extension is not automatic (for more, see the instructions to Form 8809). Having these Forms W-2 and 1099 in hand earlier at least theoretically makes it easier for the IRS to verify the legitimacy of tax returns and properly issue refunds to eligible taxpayers. But they do make for a busy January in many accounting and compliance departments.

“Gig” or “Sharing” Economy

One major area in need of clarification involves reporting under Code Sec. 6050W, Returns Relating to Payments Made in Settlement of Payment Card and Third-Party Network Transaction. In particular, a tighter definition of a third party payment network (for example, for ride sharing applications) is being called for as necessary to prevent abuse, especially since the de minimis threshold for Form 1099-K reporting under Code Sec. 6050W is high.

Entities that qualify as third-party service organizations (TPSOs) are eligible for de minimis rules that eliminate reporting on otherwise reportable amounts if either the amount paid to any service provider within a year does not exceed $20,000 or the aggregate number of such transactions does not exceed 200. This exception can completely eliminate the obligation on the part of a TPSO to issue Forms 1099-K to many “part-time” payees in such areas as rideshare.

When read with the current Instructions for Form 1099-K, the de minimis rules are being interpreted by some taxpayers as eliminating any further obligation on the part of a TSPO to report at all, including issuing a Form 1099-MISC. Payments for more than $600 for services provided by nonemployees are generally reported to the IRS on a Form 1099-MISC by a payor, with a copy provided to the service provider.However, the instructions to Form 1099-K simply say that TPSOs are required to report on service providers only if the $20,000-or-200-transactions level is reached.

Employee versus Independent Contractor

Generally, employers must withhold income taxes, withhold and pay social security and Medicare taxes, and pay unemployment tax on wages paid to employees. Information reporting to the IRS differs depending upon whether the service provider is an employee or a contractor. Whether a worker is an employee or an independent contractor depends on a number of factors.

The IRS has a Voluntary Classification Settlement Program (VCSP), which operates as an amnesty program for employers that want to reclassify previously misclassified workers. Many employees who have been incorrectly classified as independent contractors by their employers can file Form 8919, Uncollected Social Security and Medicare Tax on Wages, to figure and report the employee's share of uncollected social security and Medicare taxes due on their compensation

Expect More to Come

Former IRS Commissioner Koskinen, who left the IRS this past November, underscored the importance of third-party information reporting recently in discussing the tax gap: “when there is information reporting, such as 1099s, income is only underreported about 7 percent of the time…but that number jumps to 63% for income not subject to any third-party reporting or withholding.” With that kind of return on investment, increasing levels of information reporting seem to be here to stay.

Life insurance proceeds are received tax-free. However, any interest earned on life insurance proceeds, usually referred to as its cash value, is subject to tax. Special rules apply to transfers of ownership in a life insurance policy, accelerated death benefits, and viatical settlements.

Life insurance proceeds are received tax-free. However, any interest earned on life insurance proceeds, usually referred to as its cash value, is subject to tax. Special rules apply to transfers of ownership in a life insurance policy, accelerated death benefits, and viatical settlements.

An insurance policyholder might purchase one of many different types of life insurance covering the life of the insured. Term insurance covers a certain period of time, most often one year. If the insured does not die during the term of coverage, no policy proceeds are paid and the policy lapses. Other types of policies, including ordinary life insurance, whole life insurance, variable life insurance, and universal life insurance, provide insurance (and, often, an investment component) during the insured's life span.

Regardless of the type of policy, the beneficiary pays no tax on the proceeds when the insured dies. However, sometimes, usually due to a delay in paying the policy proceeds, the life insurance company pays the beneficiary interest in addition to proceeds. Any interest paid by the life insurance company must be included in income. The exclusion from gross income applies only to the policy proceeds.

If a policy owner surrenders a life insurance policy in exchange for its cash value, the amount received is not the result of the insured's death. Therefore, it is not tax-free and is considered ordinary income to the policyholder. Only the amounts paid by the policy owner, which are a return of capital, are not taxed. The remainder is subject to tax.

Traditionally, life insurance was intended to provide financial assistance to the insured's survivors. In some cases, however, terminally or chronically ill policyholders may sell the policy to meet their financial needs prior to death. When a policyholder sells the policy back to the insurance company for a percentage of its face value, the proceeds are called "accelerated death benefits."

The policyholder might also sell the policy to a third party for a lump-sum payment. The proceeds are referred to as a "viatical settlement" and the third party is usually a viatical settlement company. The third party becomes the policyholder and beneficiary.

Accelerated death benefits and viatical settlement payments are not paid on account of the death of the insured. However, they may be excluded from income only if the person is diagnosed with a terminal illness (or a chronic illness, but only to cover long-term care expenses).

Life insurance may also be used for tax planning purposes, either in a personal or business setting. For these and other refinements as applied to the general rules, please contact this office for details.

The method and systems by which a taxpayer calculates the amount of income, gains, losses, deductions, and credits and determines when these items must be reported, constitute the taxpayer's method of tax accounting. Although the Tax Code and the regulations authorize the use of several accounting methods, and permit certain combinations of methods, a taxpayer must use the accounting method on the basis of which the taxpayer regularly computes book income. Further, the method must be used consistently and must clearly reflect income.

The method and systems by which a taxpayer calculates the amount of income, gains, losses, deductions, and credits and determines when these items must be reported, constitute the taxpayer's method of tax accounting. Although the Tax Code and the regulations authorize the use of several accounting methods, and permit certain combinations of methods, a taxpayer must use the accounting method on the basis of which the taxpayer regularly computes book income. Further, the method must be used consistently and must clearly reflect income.

A taxpayer's method of accounting includes not only the overall method of accounting, but also the accounting treatment of any item. The taxpayer may not treat a particular item in a manner that differs from the overall method.

After a taxpayer has adopted a particular method of accounting, either as an overall method of accounting or as a method of accounting for a particular material item, any changes in accounting method must first be approved by the IRS. The IRS may exercise its sole discretion in accepting a taxpayer's return as computed under the new method of accounting, unless the taxpayer has properly obtained its prior consent to the change.

A change in accounting method may be requested by a taxpayer or required by the IRS. The IRS usually must approve all changes in methods and may specify conditions for implementing the change. The IRS grants automatic consent to many accounting changes. Catch-up adjustments that prevent items of income and expenses from being omitted or reported twice, thereby avoiding possible post-change distortion of income, may be required.

The IRS has provided procedures for obtaining its consent to a change in accounting method. There are two types of consent—automatic consent and advance (non-automatic) consent. Both types of consent require taxpayers to file a Form 3115, Application for Change in Accounting Method. The advance consent procedures require payment of a user fee. The current IRS List of Automatic Changes is found in Rev. Proc. 2017-30.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of December 2017.

As an individual or business, it is your responsibility to be aware of and to meet your tax filing/reporting deadlines. This calendar summarizes important federal tax reporting and filing data for individuals, businesses and other taxpayers for the month of December 2017.

Taxpayers that place new business assets other than real property in service through 2012 may claim a "bonus" depreciation deduction. Although the bonus depreciation deduction is generally equal to 50 percent of the cost of qualified property, the rate has been increased by recent legislation to 100 percent for new business assets acquired after September 8, 2010 and placed in service before January 1, 2012. Thus, the entire cost of such 100 percent rate property is deducted in a single tax year rather than over the three- to 20-year depreciation period that is normally assigned to the property based on its type or the business activity in which it is used.

Taxpayers that place new business assets other than real property in service through 2012 may claim a "bonus" depreciation deduction. Although the bonus depreciation deduction is generally equal to 50 percent of the cost of qualified property, the rate has been increased by recent legislation to 100 percent for new business assets acquired after September 8, 2010 and placed in service before January 1, 2012. Thus, the entire cost of such 100 percent rate property is deducted in a single tax year rather than over the three- to 20-year depreciation period that is normally assigned to the property based on its type or the business activity in which it is used.

Every business should consider taking advantage of 100 percent bonus depreciation while it is available this year. Ironically, the benefits of 100 percent bonus depreciation are so favorable that some of the regular tax rules standing guard under normal circumstances to prevent abuses are being unintentionally triggered. The IRS has now come to the rescue with a few clarifications, elections and workarounds, in the form of Rev. Proc. 2011-26.

The most important clarifications/elections provide:

--A taxpayer is deemed to acquire qualified property when it pays or incurs the cost of the property.

--Bonus depreciation may be claimed at the 100 percent rate even though a pre-September 9, 2010 binding acquisition contract was in effect provided the contract was not in effect before January 1, 2008.

--Qualified property that a taxpayer manufactures, constructs, or produces is considered acquired by the taxpayer when the taxpayer begins constructing, manufacturing, or producing that property.

--A taxpayer may elect to claim 100 percent bonus depreciation on a component of a larger property if the component is acquired after September 8, 2010 even though manufacture, construction, or production of the larger property began before September 9, 2010.

--A taxpayer may elect the 50 percent rate in place of the 100 percent rate but only in a tax year that includes September 9, 2010.

Election Procedures for 2009/2010 FY Taxpayers

Special procedures that mainly affect fiscal-year (FY) 2009-2010 taxpayers who filed returns prior to the reinstatement of bonus depreciation for the 2010 calendar year explain how to claim or not claim the bonus deduction on property placed in service in 2010.

"Safe Harbor" Enhances Bonus Depreciation for Cars

The guidance also provides an important benefit to taxpayers who purchase a new automobile in 2010 or 2011 that is eligible for the 100 percent bonus rate but which is subject to annual depreciation caps because the vehicle has a gross vehicle weight rating of 6000 pounds or less. The benefit comes in the form of a "safe harbor method of accounting," which allows a taxpayer to claim depreciation deductions in each year of the vehicle's depreciation period.

If this safe harbor method of accounting is not adopted, a taxpayer may only claim a depreciation deduction in the tax year that the vehicle is purchased and that deduction is limited to the amount of the first-year depreciation cap ($11,060 for cars and $11,160 for trucks and vans placed in service in 2010).

If the safe harbor method is adopted, a taxpayer may claim the amount of the first-year depreciation cap in the year the vehicle is purchased plus additional amounts in each of the next five tax years of the vehicle's regular depreciation period.

In most cases, the amount of depreciation allowed in each year of a vehicle's recovery period under the safe harbor method is the same amount that could have been claimed if the 50 percent bonus rate applied.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

As the 2015 tax filing season comes to an end, now is a good time to begin thinking about next year's returns. While it may seem early to be preparing for 2016, taking some time now to review your recordkeeping will pay off when it comes time to file next year.

Taxpayers are required to keep accurate, permanent books and records so as to be able to determine the various types of income, gains, losses, costs, expenses and other amounts that affect their income tax liability for the year. The IRS generally does not require taxpayers to keep records in a particular way, and recordkeeping does not have to be complicated. However, there are some specific recordkeeping requirements that taxpayers should keep in mind throughout the year.

Business Expense Deductions

A business can choose any recordkeeping system suited to their business that clearly shows income and expenses. The type of business generally affects the type of records a business needs to keep for federal tax purposes. Purchases, sales, payroll, and other transactions that incur in a business generate supporting documents. Supporting documents include sales slips, paid bills, invoices, receipts, deposit slips, and canceled checks. Supporting documents for business expenses should show the amount paid and that the amount was for a business expense. Documents for expenses include canceled checks; cash register tapes; account statements; credit card sales slips; invoices; and petty cash slips for small cash payments.

The Cohan rule. A taxpayer generally has the burden of proving that he is entitled to deduct an amount as a business expense or for any other reason. However, a taxpayer whose records or other proof is not adequate to substantiate a claimed deduction may be allowed to deduct an estimated amount under the so-called Cohan rule. Under this rule, if a taxpayer has no records to provide the amount of a business expense deduction, but a court is satisfied that the taxpayer actually incurred some expenses, the court may make an allowance based on an estimate, if there is some rational basis for doing so.

However, there are special recordkeeping requirements for travel, transportation, entertainment, gifts and listed property, which includes passenger automobiles, entertainment, recreational and amusement property, computers and peripheral equipment, and any other property specified by regulation. The Cohan rule does not apply to those expenses. For those items, taxpayers must substantiate each element of an expenditure or use of property by adequate records or by sufficient evidence corroborating the taxpayer's own statement.

Individuals

Record keeping is not just for businesses. The IRS recommends that individuals keep the following records:

Copies of Tax Returns. Old tax returns are useful in preparing current returns and are necessary when filing an amended return.

Adoption Credit and Adoption Exclusion. Taxpayers should maintain records to support any adoption credit or adoption assistance program exclusion.

Employee Expenses. Travel, entertainment and gift expenses must be substantiated through appropriate proof. Receipts should be retained and a log may be kept for items for which there is no receipt. Similarly, written records should be maintained for business mileage driven, business purpose of the trip and car expenses for business use of a car.

Business Use of Home. Records must show the part of the taxpayer's home used for business and that such use is exclusive. Records are also needed to show the depreciation and expenses for the business part of the home.

Capital Gains and Losses. Records must be kept showing the cost of acquiring a capital asset, when the asset was acquired, how the asset was used, and, if sold, the date of sale, the selling price and the expenses of the sale.

Basis of Property. Homeowners must keep records of the purchase price, any purchase expenses, the cost of home improvements and any basis adjustments, such as depreciation and deductible casualty losses.

Basis of Property Received as a Gift. A donee must have a record of the donor's adjusted basis in the property and the property's fair market value when it is given as a gift. The donee must also have a record of any gift tax the donor paid.

Service Performed for Charitable Organizations. The taxpayer should keep records of out-of-pocket expenses in performing work for charitable organizations to claim a deduction for such expenses.

Pay Statements. Taxpayers with deductible expenses withheld from their paychecks should keep their pay statements for a record of the expenses.

Divorce Decree. Taxpayers deducting alimony payments should keep canceled checks or financial account statements and a copy of the written separation agreement or the divorce, separate maintenance or support decree.

Don't forget receipts. In addition, the IRS recommends that the following receipts be kept:

Proof of medical and dental expenses;

Form W-2, Wage and Tax Statement, and canceled checks showing the amount of estimated tax payments;

Canceled checks or receipts showing charitable contributions, and for contributions of $250 or more, an acknowledgment of the contribution from the charity or a pay stub or other acknowledgment from the employer if the contribution was made by deducting $250 or more from a single paycheck;

Receipts, canceled checks and other documentary evidence that evidence miscellaneous itemized deductions; and

Pay statements that show the amount of union dues paid.

Electronic Records/Electronic Storage Systems

Records maintained in an electronic storage system, if compliant with IRS specifications, constitute records as required by the Code. These rules apply to taxpayers that maintain books and records by using an electronic storage system that either images their hard-copy books and records or transfers their computerized books and records to an electronic storage media, such as an optical disk.

The electronic storage rules apply to all matters under the jurisdiction of the IRS including, but not limited to, income, excise, employment and estate and gift taxes, as well as employee plans and exempt organizations. A taxpayer's use of a third party, such as a service bureau or time-sharing service, to provide an electronic storage system for its books and records does not relieve the taxpayer of the responsibilities described in these rules. Unless otherwise provided under IRS rules and regulations, all the requirements that apply to hard-copy books and records apply as well to books and records that are stored electronically under these rules.

A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.

A limited liability company (LLC) is a business entity created under state law. Every state and the District of Columbia have LLC statutes that govern the formation and operation of LLCs.

The main advantage of an LLC is that in general its members are not personally liable for the debts of the business. Members of LLCs enjoy similar protections from personal liability for business obligations as shareholders in a corporation or limited partners in a limited partnership. Unlike the limited partnership form, which requires that there must be at least one general partner who is personally liable for all the debts of the business, no such requirement exists in an LLC.

A second significant advantage is the flexibility of an LLC to choose its federal tax treatment. Under IRS's "check-the-box rules, an LLC can be taxed as a partnership, C corporation or S corporation for federal income tax purposes. A single-member LLC may elect to be disregarded for federal income tax purposes or taxed as an association (corporation).

LLCs are typically used for entrepreneurial enterprises with small numbers of active participants, family and other closely held businesses, real estate investments, joint ventures, and investment partnerships. However, almost any business that is not contemplating an initial public offering (IPO) in the near future might consider using an LLC as its entity of choice.

Deciding to convert an LLC to a corporation later generally has no federal tax consequences. This is rarely the case when converting a corporation to an LLC. Therefore, when in doubt between forming an LLC or a corporation at the time a business in starting up, it is often wise to opt to form an LLC. As always, exceptions apply. Another alternative from the tax side of planning is electing "S Corporation" tax status under the Internal Revenue Code.

A business with a significant amount of receivables should evaluate whether some of them may be written off as business bad debts. A business taxpayer may deduct business bad debts if the receivable becomes partially or completely worthless during the tax year.

A business with a significant amount of receivables should evaluate whether some of them may be written off as business bad debts. A business taxpayer may deduct business bad debts if the receivable becomes partially or completely worthless during the tax year.

In general, most business taxpayers must use the specific charge-off method to account for bad debts. The deduction in any case is limited to the taxpayer's adjusted basis in the receivable.

The deduction allowed for bad debts is an ordinary deduction, which can serve to offset regular business income dollar for dollar. If the taxpayer holds a security, which is a capital asset, and the security becomes worthless during the tax year, the tax law only allows a deduction for a capital loss. However, notes receivable obtained in the ordinary course of business are not capital assets. Therefore, if such notes become partially or completely worthless during the tax year, the taxpayer may claim an ordinary deduction for bad debts.

For a taxpayer to sustain a bad debt deduction, the debt must be bona fide. The IRS looks carefully at a bad debt of a family member.

To be entitled to a business debt write off, the taxpayer must also make a reasonable attempt to collect the debt. However, in a nod to reality, the IRS does not request the taxpayer to turn the debt over to a collection agency or file a lawsuit in an attempt to collect the debt if doing so has little probability of success.

Deadlines for claiming a write off for any past business bad debt must be watched. Taxpayers have until the later of (1) seven years from the date they timely filed their tax return or (2) two years from the time they paid the tax, to claim a refund for a deduction for a wholly worthless debt not deducted on the original return.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Estimated tax is used to pay tax on income that is not subject to withholding or if not enough tax is being withheld from a person's salary, pension or other income. Income not subject to withholding can include dividends, capital gains, prizes, awards, interest, self-employment income, and alimony, among other income items. Generally, individuals who do not pay at least 90 percent of their tax through withholding must estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year.

Basic rules

The "basic" rules governing estimated tax payments are not always synonymous with "straightforward" rules. The following addresses some basic rules regarding estimated tax payments by corporations and individuals:

Corporations. For calendar-year corporations, estimated tax installments are due on April 15, June 15, September 15, and December 15. If any due date falls on a Saturday, Sunday or legal holiday, the payment is due on the first following business day. To avoid a penalty, each installment must equal at least 25 percent of the lesser of:

100 percent of the tax shown on the corporation's current year's tax return (or of the actual tax, if no return is filed); or

100 percent of the tax shown on the corporation's return for the preceding tax year, provided a positive tax liability was shown and the preceding tax year consisted of 12 months.

A lower installment amount may be paid if it is shown that use of an annualized income method, or for corporations with seasonal incomes, an adjusted seasonal method, would result in a lower required installment.

Individuals. For individuals (including sole proprietors, partners, self-employeds, and/or S corporation shareholders who expect to owe tax of more than $1,000), quarterly estimated tax payments are due on April 15, June 15, September 15, and January 15. Individuals who do not pay at least 90 percent of their tax through withholding generally are required to estimate their income tax liability and make equal quarterly payments of the "required annual payment" liability during the year. The required annual payment is generally the lesser of:

90 percent of the tax ultimately shown on your return for the 2015 tax year, or 90 percent of the tax due for the year if no return is filed;

100 percent of the tax shown on your return for the preceding (2014) tax year if that year was not for a short period of less than 12 months; or

The annualized income installment.

For higher-income taxpayers whose adjusted gross income (AGI) shown on your 2014 tax return exceeds $150,000 (or $75,000 for a married individual filing separately in 2015), the required annual payment is the lesser of 90 percent of the tax for the current year, or 110 percent of the tax shown on the return for the preceding tax year.

Adjusting estimated tax payments

If you expect an uneven income stream for 2015, your required estimated tax payments may not necessarily be the same for each remaining period, requiring adjustment. The need for, and the extent of, adjustments to your estimated tax payments should be assessed at the end of each installment payment period.

For example, a change in your or your business's income, deductions, credits, and exemptions may make it necessary to refigure estimated tax payments for the remainder of the year. Likewise for individuals, changes in your exemptions, deductions, and credits may require a change in estimated tax payments. To avoid either a penalty from the IRS or overpaying the IRS interest-free, you may want to increase or decrease the amount of your remaining estimated tax payments.

Refiguring tax payments due

There are some general steps you can take to reconfigure your estimated tax payments. To change your estimated tax payments, refigure your total estimated tax payments due. Then, figure the payment due for each remaining payment period. However, be careful: if an estimated tax payment for a previous period is less than one-fourth of your amended estimated tax, you may be subject to a penalty when you file your return.

If you would like further information about changing your estimated tax payments, please contact our office.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

The tax rules surrounding the dependency exemption deduction on a federal income tax return can be complicated, with many requirements involving who qualifies for the deduction and who qualifies to take the deduction. The deduction can be a very beneficial tax break for taxpayers who qualify to claim dependent children or other qualifying dependent family members on their return. Therefore, it is important to understand the nuances of claiming dependents on your tax return, as the April 18 tax filing deadline is just around the corner.

Dependency deduction

You are allowed one dependency exemption deduction for each person you claim as a qualifying dependent on your federal income tax return. The deduction amount for the 2010 tax year is $3,650. If someone else may claim you as a dependent on their return, however, then you cannot claim a personal exemption (also $3,650) for yourself on your return. Additionally, your standard deduction will be limited.

Only one taxpayer may claim the dependency exemption per qualifying dependent in a tax year. Therefore, you and your spouse (or former spouse in a divorce situation) cannot both claim an exemption for the same dependent, such as your son or daughter, when you are filing separate returns.

Who qualifies as a dependent?

The term "dependent" includes a qualifying child or a qualifying relative. There are a number of tests to determine who qualifies as a dependent child or relative, and who may claim the deduction. These include age, relationship, residency, return filing status, and financial support tests.

The rules regarding who is a qualifying child (not a qualifying relative, which is discussed below), and for whom you may claim a dependency deduction on your 2010 return, generally are as follows:

-- The child is a U.S. citizen, or national, or a resident of the U.S., Canada, or Mexico;

-- The child has lived with you a majority of nights during the year, whether or not he or she is related to you;

-- The child receives less than $3,650 of gross income (unless the dependent is your child and either (1) is under age 19, (2) is a full-time student under age 24 before the end of the year), or (3) any age if permanently and totally disabled;

-- The child receives more than one-half of his or her support from you; and

-- The child does not file a joint tax return (unless solely to obtain a tax refund).

Qualifying relatives

The rules for claiming a qualifying relative as a dependent on your income tax return are slightly different from the rules for claiming a dependent child. Certain tests must also be met, including a gross income and support test, and a relationship test, among others. Generally, to claim a "qualifying relative" as your dependent:

-- The individual cannot be your qualifying child or the qualifying child of any other taxpayer; -- The individual's gross income for the year is less than $3,650; -- You provide more than one-half of the individual's total support for the year; -- The individual either (1) lives with you all year as a member of your household or (2) does not live with you but is your brother or sister (include step and half-siblings), mother or father, grandparent or other direct ancestor, stepparent, niece, nephew, aunt, or uncle, or inlaws. Foster parents are excluded.

Although age is a factor when claiming a qualifying child, a qualifying relative can be any age.

Special rules for divorced and separated parents

Certain rules apply when parents are divorced or separated and want to claim the dependency exemption. Under these rules, generally the "custodial" parent may claim the dependency deduction. The custodial parent is generally the parent with whom the child resides for the greater number of nights during the year.

However, if certain conditions are met, the noncustodial parent may claim the dependency exemption. The noncustodial parent can generally claim the deduction if:

-- The custodial parent gives up the tax deduction by signing a written release (on Form 8332 or a similar statement) that he or she will not claim the child as a dependent on his or her tax return. The noncustodial parent must attach the statement to his or her tax return; or

-- There is a multiple support agreement (Form 2120, Multiple Support Declaration) in effect signed by the other parent agreeing not to claim the dependency deduction for the year.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

In order to be tax deductible, compensation must be a reasonable payment for services. Smaller companies, whose employees frequently hold significant ownership interests, are particularly vulnerable to IRS attack on their compensation deductions.

Reasonable compensation is generally defined as the amount that would ordinarily be paid for like services by like enterprises under like circumstances. This broad definition is supplemented, for purposes of determining whether compensation is deductible as an ordinary and necessary expense, by a number of more specific factors expressed in varying forms by the IRS, the Tax Court and the Circuit Courts of Appeal, and generally relating to the type and extent of services provided, the financial concerns of the company, and the nature of the relationship between the employee and the employer.

Why IRS Is Interested

A chief concern behind the IRS's keen interest in what a company calls "compensation" is the possibility that what is being labeled compensation is in fact a constructive dividend. If employees with ownership interests are being paid excessive amounts by the company, the IRS may challenge compensation deductions on the grounds that what is being called deductible compensation is, in fact, a nondeductible dividend.

Another area of concern for the IRS is the payment of personal expenses of an employee that are disguised as businesses expenses. There, the business is trying to obtain a business expense deduction without the offsetting tax paid by the employee in recognizing income. In such cases, a business and its owners can end up with a triple loss after an IRS audit: taxable income to the individual, no deduction to the business and a tax penalty due from both parties.

Factors Examined

The factors most often examined by the IRS in deciding whether payments are reasonable compensation for services or are, instead, disguised dividend payments, include:

The salary history of the individual employee

Compensation paid by comparable employers to comparable employees

The salary history of other employees of the company

Special employee expertise or efforts

Year-end payments

Independent inactive investor analysis

Deferred compensation plan contributions

Independence of the board of directors

Viewpoint of a hypothetical investor contemplating purchase of the company as to whether such potential investor would be willing to pay the compensation.

Failure to pass the reasonable compensation test will result in the company's loss of all or part of its deduction. Analysis and examination of a company's compensation deductions in light of the relevant listed factors can provide the company with the assurance that the compensation it pays will be treated as reasonable -- and may in the process prevent the loss of its deductions.

Note: In the case of publicly held corporations, a separate $1 million dollar per person cap is also placed on deductible compensation paid to the CEO and each of the four other highest-paid officers identified for SEC purposes. (Certain types of compensation, including performance-based compensation approved by outside directors, are not included in the $1 million limitation.)

The S Corp Enigma

The opposite side of the reasonable compensation coin is present in the case of some S corporations. By characterizing compensation payments as dividends, the owners of these corporations seek to reduce employment taxes due on amounts paid to them by their companies. In these cases, the IRS attempts to recharacterize dividends as salary if the amounts were, in fact, paid to the shareholders for services rendered to the corporation.

Caution. In the course of performing the compensation-dividend analysis, watch out for contingent compensation arrangements and for compensation that is proportional to stock ownership. While not always indicators that payments are distributions of dividends instead of compensation for services, their presence does suggest the possibility. Compensation plans should not be keyed to ownership interests. Contingent and incentive arrangements are also scrutinized by the IRS. The courts have frequently ruled that a shareholder has a built-in interest in seeing that the company is successful and rewarding him for increasing the value of his own property is inappropriate. Similar to the reasonable compensation test, however, this rule is not hard and fast. Accordingly, the rules followed in each jurisdiction will control there.

Conclusions

Determining whether a shareholder-employee's compensation is reasonable depends upon many variables, such as the contributions that employee makes to your business, the compensation levels within your industry, and whether an independent investor in your company would accept the employee's compensation as reasonable.

Please call our office for a more customized analysis of how your particular compensation package fits into the various rules and guidelines. Further examination of your practices not only may help your business better sustain its compensation deductions; it may also help you take advantage of other compensation arrangements and opportunities.